Under the Spotlight Wall St: ExxonMobil (XOM)

President-elect Donald Trump wants the U.S. oil industry to ‘drill, baby, drill’. ExxonMobil ($XOM) CEO Darren Woods has a less sexy three-word slogan that may stand in Trump’s way: total shareholder return. 

Three decades at the US$529b energy giant have taught Woods that oversupply hurts returns. Since becoming CEO in 2017, he’s instilled greater financial discipline by investing in higher return projects that meet consumer and industry demand, rather than the demands of populist politicians. ‘I don’t think there’s anybody out there that’s developing a business strategy to respond to a political agenda,’ Woods said ahead of the 5 November election. 

ExxonMobil has played a lead role in providing oil, gas, refined products and chemicals since John D Rockefeller created Standard Oil in 1870. It’s now navigating a global economy well supplied with oil as China’s crude oil imports decline. Brent has fallen from US$90 a barrel in March to US$72 on concerns about Chinese demand. Trump’s rallying cry for more production contrasts sharply with the reality of abundant supply from the world’s biggest oil producer – the U.S.

Mega deal

ExxonMobil has room to grow supply after acquiring Pioneer Natural Resources in 2023 for US$59.5b.   

It was the company’s biggest deal since the US$80b merger of Exxon and Mobil in the late 1990s. The transaction makes it the largest oil producer in the prolific Permian Basin, with more than 1.3 million barrels of oil equivalent per day (boepd).

The deal’s value was showcased in the company’s Q3 earnings. ExxonMobil achieved its highest liquids production in over 40 years with 3.2m barrels per day. TAverage production this year, which includes gas, increased 14% year-on-year to 4.3m boepd.  

Acquiring Pioneer is key to plans to increase production to over 5m boepd by 2027. More than 60% of that production is targeted to come from ‘advantaged assets’: long-life, low-cost assets that can deliver good returns across the commodity price cycle. Apart from its Permian assets, other advantaged assets include its Guyana operations. Growth in those projects has delivered higher profitability: average profit per barrel has doubled over the past five years to US$10 per barrel.  

The quality of its upstream oil and gas business is offsetting tough conditions in its downstream divisions. Upstream earnings total $18.9b so far this year, up from US$17.1b over the first three quarters of 2023. That accounts for around 70% of ExxonMobil’s US$26b in earnings so far in FY24. However, earnings from its energy products division – or refineries – have tumbled to US$3.6b over the first three quarters, down from US$8.9b in 2023. Refining margins have been crunched by the addition of new refining capacity.   

Drilling down

Woods views cost cutting as key to delivering total shareholder returns. ExxonMobil is targeting structural cost savings of US$15b by 2027, up from the US$11.3b stripped from the business since 2019. Savings have come from selling lower performing assets like oil projects and refineries, supply chain efficiencies and from faster maintenance turnarounds at its remaining refineries. 

Technology is also an important source of efficiencies and cost savings. Its ‘cube drilling’ tech will play an important role in extracting maximum value from its unconventional assets, like those acquired through Pioneer. The use of multiple horizontal wells from a single surface location allows more efficient and cost-effective production from new fields.    

It’s all about maximising cash available to meet the demands of the business and investors. ExxonMobil generated $42.8b of cash flow from operations so far in FY24 and US$26.35b of free cash flow. It will spend US$28b on capex this year and update its plans when it meets with investors on 11 December. 

Cash flows are vital to maintaining the company’s status as a dividend aristocrat. ExxonMobil has increased its annual dividend for 42 consecutive years, joining only 4% of the S&P 500 Index that match or better that record. It’s one of the top five companies in terms of dividends paid. Combined with strong volume growth, rising dividends have helped lift ExxonMobil shares 20% this year, outpacing a 13% gain in the Energy Select Sector SPDR Fund ($XLE). 

Just not oil

While fossil fuels are a big part of ExxonMobil’s business – which gets a thumbs down from some investors – the company is also investing in the energy transition.  

The US$4.9b acquisition of Denbury in 2023 gave the company ownership of the largest owned and operated CO2 pipeline in the U.S. and ten onshore carbon sequestration sites. It’s also growing lithium production and working on synthetic graphite used in batteries. 

Management is also upbeat about its Proxxima resin product, which has high tensile strength and is lightweight. One application is to replace steel in rebar used in the construction industry, a potentially large market. Less steel rebar would mean less iron ore and coal used in the production of steel. 

Oils ain’t oils

ExxonMobil is the big dog of the U.S. oil and gas industry. Its focus on high returning assets, cost savings, cash flows and dividends see its shares trading near a record high despite weak oil prices.

The company needs to ensure it maintains its disciplined approach to satisfying market demand – not diktats from Washington D.C. 

This does not constitute financial advice nor a recommendation to invest in the securities listed. The information presented is intended to be of a factual nature only. Past performance is not a reliable indicator of future performance. As always, do your own research and consider seeking financial, legal and taxation advice before investing.